If you are thinking of buying construction shares right now, either stay out or go in selectively, because the sector is patchy and under pressure. And if you go in, first focus should probably be on Murray & Roberts and Group Five. Aveng is a more desperate group and, therefore, a longer shot. Recovery in smaller companies, like, Basil Read, is even further off. That's the thumbnail investment perception that Stephen Meintjes, Head of Research at Imara S P Reid, puts across in this interview with Alec Hogg. He says Murray & Roberts, and other companies which are active offshore, or across SA borders, are less constrained than those that are home-focused. It's not that they have given up on South Africa. It's just that they are taking advantage of growth opportunities where it appears they are more welcome and where the profits are higher…until the "missing-in- action" Government infrastructure roll out occurs, says Stephen. GK.ALEC HOGG: The total number of buildings completed in South Africa in the first quarter of this year, indicates that another sector under pressure is construction. This time under extreme pressure, however the numbers that we did see from construction group, Murray & Roberts, which came out this week, suggests that that company, at least is navigating its way through a very difficult period. With us, in the studio to talk us through what's going on in the construction sector, whether there are opportunities, indeed for investors, is Stephen Meintjes. Stephen, we've had Murray & Roberts this week. We had Aveng as well. We've had Group Five a little while ago. Are you picking up a theme from the sets of results? I think we won't know completely, until Wilson Bayly comes out on Monday, I think it is..STEPHEN MEINTJES: Yes..ALEC HOGG: Are you getting a theme from what's happening in the construction sector, from these numbers?.STEPHEN MEINTJES: Well, I think in one word – patchy. Certainly, Murray & Roberts and the other part of the theme is international. If you're international then you are not quite so constrained, as those numbers would suggest by the South African situation and, certainly Murray & Roberts has re-jigged its divisional breakdown once again, to focus on its overall, international outlook..ALEC HOGG: We've been hearing that theme on this program from CEOs, and from experts like yourself, continuously over the last few weeks and months perhaps..STEPHEN MEINTJES: Yes..ALEC HOGG: That South African companies are really giving up on South Africa, if they can and moving offshore or outside of the borders, where it appears they are more welcome and where the profits are higher..STEPHEN MEINTJES: Well, I wouldn't say it's giving up because the way the Murray & Roberts is going to operate is that it can move resources around the place, from Australia to South Africa, from South Africa to elsewhere in Africa. They are also strong and they see a lot of underground mining opportunities..ALEC HOGG: When you say 'resources', is that people?.STEPHEN MEINTJES: People, yes, in the various companies. Underground mining, for example, they can operate, well certainly in Africa and North America, and maybe elsewhere as well. They've adapted to the situation. They've got a powerful base here but, really, when you go to the Murray & Roberts' precinct in Bedfordview, its Headquarters of an international group..ALEC HOGG: So the South African operation is still big but it is not a whole lot of growth. The growth they're looking for is elsewhere. Is that the message?.STEPHEN MEINTJES: Yes, that is the message until this 'missing in action' Government infrastructure rollout occurs, but even in South Africa Murray & Roberts have got good work with the Venetia Mine. At Medupi in Eskom, we know all about but ongoing work with Eskom. Eskom has got to maintain old power stations. There's going to be a lot of maintenance work down the years. They are tendering for Sasol now. They are hopeful of getting work from Sasol, for the first time in many years, so it's not as though their things have completely dried up but again, it's more engineering. It is not your basic construction work or roads..ALEC HOGG: What happens to a group, like Murray & Roberts, with Medupi and Kusile, when they are so far behind? Do they get paid on time? Or do they just simply have to stretch their own accounts and cash flows?.STEPHEN MEINTJES: Well, I didn't attend the presentation but I listened in and the whole area, a lot of the questions at the presentation were about claims, and where they are with them and how much they provide? It is a very, complex issue but I think the real theme from the Murray & Roberts' results was that out of the four divisions, three are looking quite optimistic. Management is quite optimistic of better things to come..ALEC HOGG: I guess from another base though, it has to be said..STEPHEN MEINTJES: Sure..ALEC HOGG: The Competition Commission Investigation – is there still any hangover from that or is it 'business as usual', as far as construction, companies are concerned?.STEPHEN MEINTJES: Well, there is an issue of re-establishing trust with the Government but I think basically, it is done and dusted. None of them seemed to have received any claims from erstwhile clients. They've paid their collusion dues to the Competition Commission and there is a possibility of claims from erstwhile clients..ALEC HOGG: I guess you'd expect them to go and settle those claims before they came into the public domain..STEPHEN MEINTJES: That's right, well of course nobody can really say anything, because it is all very much a case of wait and see, and that may not amount to anything because, of course, it's a 'given' that is very difficult to prove how much you did actually lose, apart from the specific collusion in profits..ALEC HOGG: There's a really, interesting graph that Mike Schussler has published on Money Web this morning..STEPHEN MEINTJES: Yes..ALEC HOGG: Where it shows that plans passed and the completed construction is back to where it was in 2005. That's almost ten years ago, in South Africa of course, and I suppose that talks to what you were saying earlier, about the local economy and the local opportunities..STEPHEN MEINTJES: Well, very much so and I think as far as the infrastructure rollouts are concerned, wherever possible Government has packaged contracts in smaller amounts, to the extent that it is possible, so again, that precludes the big players to some extent. There will be work and if you look very closely at those graphs, you'll see there's a little optic at the end, in plans passed, so it could improve..ALEC HOGG: So we've just got to grit our teeth and take a deep breath. This too shall pass..STEPHEN MEINTJES: Yes, absolutely..ALEC HOGG: Would you be buying construction shares on the view that 'this too shall pass'?.STEPHEN MEINTJES: No, I think one has to be very selective. I think, at this stage, we are quite happy with Murray & Roberts, and Group Five. Aveng may take quite a bit longer. It's a more desperate group. The impression we get, it doesn't have quite the cohesion that seems to be in place with the other two. Then the smaller companies, like Basil Read their recovery seems to be even further off..ALEC HOGG: Stephen, thank you for your insights. Stephen Meintjes is with Imara S.P. Reid. He is the Head of Research.
